Companies Should Separate Clients’ Crypto Assets From Their Own: NYDFS

The New York State Department of Financial Services (NYDFS) has urged companies to separate customers’ cryptocurrency holdings from their own assets.

The watchdog argued that the mixing of funds could result in significant financial loss for investors.

The NYDFS Recommendation

New York’s Financial Watchdog Posted advice to state-regulated companies on how they should better protect their customers in the event of potential insolvency. He pointed to the growing interest in cryptocurrencies in recent years and insisted that entities should maintain greater control over their clients’ holdings. The agency also believes that the market must operate within an appropriate regulatory framework:

“As custodians of the assets of others, Virtual Currency Entities (VCEs) that act as custodians play an important role in the financial system and therefore a comprehensive and secure regulatory framework is essential to protect customers. and maintain trust.”

The NYDFS has urged organizations to separate consumer crypto possessions from other assets. “A VCE custodian is expected not to mix the customer’s virtual currency with any of the VCE custodian’s virtual currencies or with any other non-customer virtual currency,” the department added.

They must also publish records and maintain a “clear internal audit trail” to identify people about any transactions involving their property.

The regulator said custodians should not use users’ crypto assets to settle separate financial services, such as securing a bond or extending credit.

Thereafter, they must “clearly communicate” to customers the terms and conditions under which they keep their stash.

“In addition, the department expects a VCE Custodian to make its standard disclosures and client agreement readily available to clients on its website, in a manner consistent with New York laws and regulations,” the guide concludes. .

Such measures should have existed before the collapse of FTX

Adrienne Harris – the Superintendent of NYDFS – felt that the aforementioned guidelines could have a positive impact on the cryptocurrency industry and prevent future meltdowns. However, she thinks the regulator should have acted before the disappearance of FTX.

The exchange deposit for bankruptcy in November last year after failing to honor customer withdrawal requests. One of the accusations against its former CEO – Sam Bankman-Fried (SBF) – is that his company mixed user funds with Alameda Research, which ultimately hurt many investors.

The 30-year-old American has pleaded not guilty of the charges against him. A trial set for October 2, 2023 will determine if he played a role in the fallout.